These are challenging times for the construction industry. There’s a backlog of business on the books, and that’s keeping things hopping. But keeping up – much less ahead – of demand is problematic as pressures mount.
Shortages of both labor and materials are ongoing pain points. Inflation is driving costs of everything up – including money – and threatening the viability of projects. And other outsized risks – think catastrophic events like floods, fires, earthquakes, hurricanes and tornados – are causing billions of dollars of catastrophic losses.
And, in turn, this has created an environment that has added to the pressure on the all-important Builders Risk insurance. All the uncertainties are pushing premiums up 15% to 20% in the marketplace overall, but as much as 100% in regions most exposed to weather-related risks, such as Florida, Texas and California. And getting it at any price, especially in those markets, can be problematic as capacity is increasingly limited.
In the most exposed areas, problems getting Builders Risk coverage at all, much less affordably, may cause lenders to pull back and projects to be postponed. Wherever the project, though, and especially for those valued at $10 million or more, construction firms must go the extra mile in planning against the exposures to Builders Risk losses.
Here’s how firms can position themselves to be considered best-in-class risks during a difficult market for Builders Risk.
1. Be on top of safety and security requirements.
Builders Risk insurance – or construction site property insurance – protects against damage by fire, wind, vandalism, vehicle collisions or other accidents, and may also cover construction materials stored off-site and cleanup costs such as debris removal. Insurers want pro-formas or budgets that reflect protective measures including:
- Fencing: All projects are required to be completely fenced and locked during non-working hours.
- Lighting: Adequate lighting – beyond basic street lighting – must surround the site.
- Monitoring: Security guards are one measure, but remote video monitoring with a central station alarm system is a more comprehensive approach. It’s especially important to ensure devices to detect and alert for water intrusion and fires.
- Hot works: Should hot works, welding or open flame heating be undertaken inside or outside the building, details must be provided.
2. Documentation speeds the quote process.
The more information provided to the insurance broker in advance, the more streamlined the quote process and the more likely pricing will be competitive. Here’s what should be included:
- Detailed line-item budget that breaks down hard and soft costs as well as delay in start-up costs
- Copy of the General Contractor Site Specific Safety Plan
- Geotech reports
- Architectural and site plans, drawings and sections, including project description and scope of work
- Construction schedule/Gantt chart
3. Don’t overlook Builders Risk budget “must-haves.”
When budgeting for Builders Risk, several items, length of project, soft costs and business interruption can sometimes be overlooked.
The issue with length of project budgeting is that firms often don’t take into account that it is an annual, or 12-month, rate used to price the policy. An 18-month project, then, would need to account for the extra time by multiplying the expected rate by 1.5.
Typically, soft costs and business interruption amount to 15% to 20% of the construction budget – and add to the total insurable value of the project. These limits can vary based on lender requirement and the risk tolerance of the general contractor and/or developer.
The tightness in the Builders Risk market, especially on frame construction projects, makes it critical for general contractors and project owners to plan ahead. This means opening discussions early with broker partners about upcoming building projects and their timelines so they can get into the market, prepare management for any sticker shock, and also for the possibility that it may take financing to cover the cost of the insurance premium.